Tax implications of cryptocurrency You need to know in various scenarios
The podcast is about the implications of cryptocurrency in a portfolio, particularly in relation to tax compliance in the US.
The guest, Rishita Shah, an Indian CA, and Lady Battalion commander of tax auditors at Unison Globus, provides insights into how the US taxation system works and how tax implications arise from cryptocurrencies in an individual or business entity’s portfolio.
Shah explains that a taxable event will only occur when cryptocurrency is sold or exchanged and discusses how cryptocurrency is classified as property by the IRS, with gains or losses classified as capital gains or losses reported on Schedule D of the 1040 tax return. The podcast also covers scenarios where cryptocurrency is used to buy tangible goods or pay employee salaries.
Read entire transcript below:
Transcript:
Bhumika Shah:
Hello and welcome to episode three of the Crypto Crux series on our podcast setup initiated by Unison Globus. Oops, Focks. We are late today this time, but worth the delay. At Unison Globus we recently inaugurated our Ahmedabad India office and oh, I tell you, it’s worth the drool. Check out all of our infrastructures on our LinkedIn page. Back to the Cryptocurrency series. Without further ado, I’ll give you a recap of what we discussed in the last two episodes.
The first episode was a lot more about the introduction to cryptocurrencies and the second episode was more about the accounting treatment of cryptocurrencies in books of accounts. This episode here we have is focusing and shedding light on the implications of cryptocurrency in the portfolio.
Today we have Rishita Shah, our Lady Battalion commander of tax auditors at Unison Globus. She’s an Indian CA and has 10+ years of experience and deep-driven insights into US taxation. She’s an IRS advocate at Unison Globus. Hello and welcome, Rishita. Welcome to the podcast.
Rishita Shah:
Hey, Bhumika, thank you for having me on this podcast. So we all know that crypto is a new age investing and it has gained much popularity in the last couple of years. And it is no surprise that IRS has been aggressively tracking crypto transactions and coming up with the guidelines around crypto tax compliances every now and then.
Bhumika Shah:
Sure, Yes. So that is what here we are today to talk about that and you’ll help us understand how the US taxation system works and how would be the implications, especially the tax implications of the cryptocurrencies in an individual or a business entity’s portfolio.
So let’s start with the most crucial question. How come and why is IRS concerned and very attentive about the cryptocurrency portfolio of any citizen?
Rishita Shah:
Right.
So I feel IRS, or any government for that matter, will always like to have a special focus on cryptocurrency transactions because it’s all virtual and it can be a threat to the currency system and ultimately taxation system of any country and it may attract tax evasion, money laundering, and similar other criminal activities.
Bhumika Shah:
Right.
What would be the starting point of reporting for crypto transactions on your tax return?
Rishita Shah:
Okay, so the starting point is to answer this simple question.
At any time during 2021, did you receive, sell, exchange or otherwise dispose of any financial interest in any virtual currency? And you will find this question right below your name on page one of your 1040 tax return.
Bhumika Shah:
Okay.
Right.
Which is where I’m supposed to check it, right?
Rishita Shah:
Yes. You will find two boxes there. Yes and no. And you have to answer it accordingly.
Bhumika Shah:
Right.
Okay.
So in this podcast, we have a series that is called Million Dollar Question where we shed light on very important concepts of this topic.
So I’d start with the first one, like when would I decide or what is the taxable event for a cryptocurrency transaction?
Rishita Shah:
It is a very important question. Thank you for asking me this question. Bhumika. So buying a cryptocurrency on its own is not a taxable event? You can buy and hold cryptocurrency without any taxes even if the value increases, you do not owe any taxes to IRS. A taxable event will only and only occur when you have either sold or exchanged your cryptocurrency.
Bhumika Shah:
Okay, so this was very insightful. So if that is the scenario that if I’m selling or exchanging the cryptocurrency, that is when I need to understand how it will show its implications.
Right? Okay, that comes to my next question. Which is how would I understand that? How much do I owe to IRS from my crypto transaction?
Rishita Shah:
Okay, so before coming to deciding how much we owe to IRS on crypto transactions, we first need to understand how IRS classifies a cryptocurrency.
Okay, so IRS classifies cryptocurrency as property, mostly investment property similar to stocks or shares in any company. So any gain or loss on the sale of cryptocurrency is classified as capital gain or loss and reported on Schedule D of your 1040. Again, this gain or loss can be short-term or long term depending on the period for which you hold the cryptocurrency.
So if you have held it for one year or less, it will be a short-term capital gain or loss. And if you have held it for more than a year, then it will be a long-term capital gain or loss.
Bhumika Shah:
Right. That is very interesting to know.
Okay, so let’s say we did talk about the long-term and short-term capital gain or loss. Right.
And let’s say I’m trading cryptocurrency for a sandwich like I am buying a sandwich and giving them cryptocurrency instead of the regular one. So how would that be recorded in my book?
Rishita Shah:
I like your question. Bhumika, so if you buy a sandwich or any other tangible goods using cryptocurrency, it is still a taxable transaction for you and you still need to report a capital gain or loss on your tax return. And on the other hand, it will be taxed as an ordinary income for that sandwich shop owner.
Bhumika Shah:
Okay, now we are considering that I am an entrepreneur and I am paying salaries to my employee, again, using cryptocurrency. So how would that be recorded? It’s the same.
Rishita Shah:
It is still a taxable transaction.
But now you not only pay income taxes on it, but you also are liable to pay payroll taxes on the compensation that you are paying to your employees using cryptocurrency.
Bhumika Shah:
Right. That was something we were not aware of. Thank you for shading light on that. That also brings to one very important scenario. And I suppose that is a very interesting scenario as well. So hypothetically only hypothetically, consider that I am giving you a gift of 100 bitcoins or let’s say Ethereum. And how would that be recorded in books of account?
Rishita Shah:
So if it is a gift, neither the giver nor the receiver owes any taxes until the cryptocurrency is actually sold. So at the time of sale, the giver’s basis will be used to calculate gain or loss and the giver’s basis will not be the FMB at the time of the gift, but the actual cost at the time of the purchase.
Bhumika Shah:
Right. So that is very insightful. We have tried considering various aspects of this podcast. Thank you for sharing your insightful guidance with us.
Thank you, Rishita thank you for being here today.
Rishita Shah:
Thank you, Bhumika it was lovely speaking to you.
Bhumika Shah:
Pleasure. Thank you. For more information connect to unisonglobus.com Our website address sounds like www.unisonglobus.com. Unison Globus beyond outsourcing.